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My only question is the section of the CA540 instructions that states that if the non-resident spouse has any CA-source income due to community property rules that spouse cannot file as a nonresident.

After looking through some instructions and source material, I can't find that statement.

I do, however, see one dealing with filing joint or separate returns.

Normally, you have to use the same filing status on your CA return that you use on your Federal return. However, there is an exception for a spouse that was a non-resident for the entire year AND who has no CA source income. (And there is another dealing with members of the military.) In that situation, you can file a joint federal return, but a separate CA return.

The caveat here is that if either spouse is in a community property state AND there is CA source community property income, then both spouses will have CA source income. So the MFJ federal but MFS CA return is not an option.

In our case, that issue would apply, as one spouse is a resident of CA, a community property state. Therefore the non-resident spouse has CA source income, and filing a joint federal but separate CA returns is not an option.

So if you change the last words of your statement from "as a nonresident" to "separate CA but joint Federal returns" then you've got it correct.

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